How to Reduce the Costs of a Cash Advance

If you’re short on funds but need access to cash right away, using your credit card for a cash advance might seem like the easiest way out. Unfortunately, getting a cash advance is one of the most expensive ways to use a credit card.

First, the basics. A cash advance is a temporary loan you get through your credit card. Typically, cash advances are doled out in three different ways. You can get a cash advance by using your credit card at an ATM, asking for a cash advance at a bank, or by taking advantage of the cash advance checks your card issuer sends you in the mail.

What happens when you take a cash advance

Getting access to cash through your credit card is easy, but a cash advance will cost you a pretty penny. For starters, no matter how you take out the cash advance, you’ll have to pay a transaction fee. These fees vary, but are usually a percentage of the amount of cash you’re taking out. On a $500 cash advance, you may need to pay a cash advance fee of 2%-5%, which equals $10-$25, for example.

If you’re using an ATM, you’ll likely need to pay an ATM fee on top of the cash advance. If you’re out of the country, foreign transaction fees may be charged as well (though you can avoid these fees by using a credit card with no foreign transaction fees). The size of both ATM fees and foreign transaction fees depend on where you are, who your card issuer is, and which card network (Visa, MasterCard, etc.) you’re using. (See also: How to Get Cash While Traveling Abroad)

On top of these fees, you’ll also pay a higher interest rate on cash advances than you would on regular purchases. It’s not uncommon to see, for instance, a 16% purchase APR zoom up to 26% for cash advances on that same card.

The worst part is, cash advances don’t come with a grace period like regular purchases do. This means interest begins accruing on cash advances starting from the day you take one out. (See also: What You Should Know About Credit Card Interest, Grace Periods, and Penalty APRs)

To put all these fees and interest charges in perspective, let’s imagine you’re traveling and run out of money. You head to a local ATM and withdraw $200 in U.S. dollars. Right away, you’re hit with a cash advance fee of 5%, or $10. You’re also charged an ATM fee of $5 and a foreign transaction fee of 5%, for another $15 in charges.

Now you have $200 in cash, but you already owe $225. Unfortunately, your troubles don’t stop there. You already owe more cash than you have, but interest starts accruing right away, too. And we all know what that means: spiraling costs from compound interest could cause the initial balance to get out of hand. (See also: 5 Ways to Pay Off High-Interest Credit Card Debt)

How to minimize the impact of a cash advance

Although it’s easy to see how cash advances can be dangerous for your finances, it may still be necessary to access this last-resort option from time to time. Fortunately, there are several ways to minimize the damage and financial costs that arise from a cash advance.

Pay off your cash advance as fast as you can

First, here’s some good news. Thanks to the Credit CARD Act of 2009, payments made to your credit card must be allocated to the highest interest rate balances first (except for your minimum payment, which can go to any balance the credit card issuer chooses). What this means is, any amount above the minimum payment that you pay must go toward your higher-interest cash advance balance rather than your lower-interest purchase balance.

If you must take out a cash advance, the best way to minimize its financial impact is work it so that you’re paying off the cash advance amount of your balance first. So, if you take out a cash advance of $100, you should pay at least that much, plus your minimum payment, as fast as you can — preferably before your credit card statement even closes so that you minimize the number of days you’re paying interest on the cash advance.

Yes, paying your credit card bill early is possible. You don’t have to wait for your statement to come in the mail or show up in your inbox. Thanks to online bill pay, it’s fairly easy to pay off your cash advance online as soon as you have the cash.

Borrow as little as you can

While a cash advance might seem like an easy way to get your hands on some money (especially if you use those handy cash advance checks!), keep in mind that cash advances are nothing more than a loan. You’re borrowing the money from a bank, and you’ll have to pay the amount you borrow back plus interest and all fees.

If you’re taking out a cash advance for an emergency, paying for the added expense of a cash advance could be worth it. If you’re borrowing the money for a fun night with friends, on the other hand, you may find your splurge is even more expensive than you thought.

Either way, the best way to minimize the impact of a cash advance is to borrow as little as you can get away with. The smaller the cash advance, the lower your initial fees, and the less interest you’ll pay.

Consider your alternatives

If you can get access to money another way, you may be better off avoiding cash advances altogether. If you need access to credit and not actual cash, for example, and you have a good or excellent credit score, a 0% APR credit card could do the trick.

With a 0% APR credit card that offers zero interest on purchases during a promotional period, you can use your card to buy what you need and avoid paying interest for 12 months or longer. Keep in mind, however, that most credit cards don’t consider a cash advance a “purchase” so the 0% APR would not apply to them.

If you need money fast and can’t wait to get a 0% APR card in the mail, you can also look for other sources of emergency funds. Do you have savings you could access? Do you have unwanted items you could sell? Does someone owe you money that you could collect today? Could you borrow money from a close friend or relative? Any of these options may be better than taking out an expensive cash advance.

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